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How does a health savings account (HSA) work?

How does a health savings account (HSA) work?

In this article

Would you like the ability to pay for medical expenses with pre-tax money? What about the option to build retirement savings that can be used at any time – without taxes or penalties – to pay medical expenses that arise along the way? Do you prefer health insurance coverage that comes with a higher deductible and lower premiums?

A health savings account (HSA) could be just what the doctor ordered. Used wisely, this innovative approach to health coverage may provide major advantages that could keep both your personal and financial life healthy.

What is a health savings account?

A health savings account is a tax-advantaged personal savings account that works in combination with an HSA-qualified high-deductible health insurance policy (HDHP) to provide both an investment and health coverage.

The savings account provides the funds you use to pay medical expenses that aren’t paid by your HDHP, or — if you don’t need to use it — is an interest-bearing nest egg that grows over time. Unlike FSAs, there is no “use it or lose it” rule with HSAs; the money remains in the account and can be used at any time in the future; and it can grow with interest or investment returns, depending on the type of account you set up.

The HDHP, meanwhile, is your safety net should you need coverage for major medical expenses that exceed the amount of your deductible. And as long as your HDHP isn’t grandfathered, it’s also required to pay for certain preventive care, regardless of whether you’ve met your deductible.

Sounds too good to be true? Well, remember that you’re paying a lower premium for your insurance coverage because it’s a high-deductible plan that doesn’t cover anything other than preventive care before the deductible. If you need to see the doctor for anything else, you’ll pay the entire bill (reduced according to the negotiated rates your health plan has with the doctor) if you haven’t yet met your deductible.

Can ACA Marketplace health plans be paired with HSAs?

Yes. In nearly every area of the country, there are HSA-qualified high-deductible health plans available through the exchange/Marketplace or directly from insurers that sell ACA-compliant coverage. Here’s more about how ACA regulations mesh with HSA compliance rules.

How can I enroll in an HDHP?

If you don’t have access to an employer-sponsored plan, Medicare, or Medicaid, you’ll be purchasing your coverage in the individual/family market.

Nearly everywhere in the country, HSA-qualified HDHPs are for sale in the Marketplace/exchange, and are also available for purchase directly from health insurers (but if you’re eligible for a subsidy, make sure you shop in the Marketplace; you’ll forfeit your subsidy if you buy your plan outside the exchange).

The open enrollment window for self-purchased health coverage runs from November 1 to January 15 in most states, although some states have different deadlines. Outside of open enrollment, you’ll need a special enrollment period to sign up for any major medical health plan, including HDHPs.

If you’re shopping for health coverage in the marketplace or on an insurer’s website, the HSA-qualified plans will have a label indicating that they can be paired with an HSA. In most cases, the name of the plan will have “HSA” in it. But exchanges and insurer websites also have filtering tools that will let you narrow down the plans to show only those that are HSA-compatible.

If your employer offers an HDHP, you can enroll in that option during your employer’s open enrollment period, or during a special enrollment period triggered by a qualifying life event.

What is the HSA contribution limit for 2024?

Opening an HSA allows you to pay lower federal income taxes by making tax-free deposits into your account each year. For 2024, the HSA contribution limit is $4,150 if your HDHP covers just yourself, and $8,300 if you have family HDHP coverage.1 If you’re covered under an HDHP in 2024 (even if it’s just in December), you’ll have until April 15, 2025 to make HSA contributions for 2024.

If you’re 55 or older, you can contribute an extra $1,000 a year (this is officially called an “additional contribution” and often referred to as a catch-up contribution). This amount isn’t indexed; it stays steady at $1,000 per year. And it’s important to understand that if two spouses are each 55+, they each need their own HSA in order to be able to make a catch-up contribution for each spouse.2

Most states — all but California and New Jersey — also offer tax breaks on funds deposited in these accounts (some states have no income tax, so HSA contributions would only affect federal taxes in those states, and some states do tax HSA earnings, but not contributions).

Contributions can be made by the individual who owns the account or by an employer, or by anyone else who wants to contribute on behalf of the account owner. When people contribute their own funds to an HSA, they don’t have to pay income tax on those funds. The money is either payroll deducted pre-tax (which means it’s free from income tax and FICA taxes), or deducted from your income tax on your tax return (you can deduct your contributions even if you take the standard deduction and don’t itemize). And if an employer contributes, the money is not taxed as income for the employee.

HSAs are individually owned, rather than jointly owned (they’re like IRAs in that regard). So although a couple might have family HDHP coverage and make the full family HSA contribution to one HSA each year, the HSA is actually in the name of just one spouse. So the catch-up contribution for that spouse can be made to the existing HSA (bringing the 2024 maximum contribution amount to a total of $9,300 for the couple, for example). But the other spouse will need to open their own HSA to deposit the other $1,000 catch-up contribution. This is explained in IRS Publication 969.

What is the HSA contribution limit for 2025?

The 2025 contribution limit is $4,300 if you have individual coverage under your HDHP, and $8,550 if your HDHP also covers at least one other family member.3 The catch-up contributions described above (for people 55 or older) are not indexed for inflation, so they will be $1,000 in 2025 as well.

When can I withdraw money from my HSA?

The money you deposit into your HSA is yours to withdraw at any time to pay for medical expenses that aren’t paid by your high-deductible health insurance policy or reimbursed by anyone else (so if you have a dental policy that pays part of your dental costs, for example, you can only use your HSA funds to pay the portion of your dental bill that you have to pay out-of-pocket). HSAs are considered part of consumer-driven health care (CDHC). This means you control the plan, deciding how to spend and invest those dollars, within the parameters of the rules set by the IRS.

You can withdraw the funds when you incur the medical expense, or at any point in the future, as long as you had already established the HSA when the expense was incurred. You need to keep careful records either way, but if you’re planning to wait ten years to reimburse yourself for a medical expense, the onus is on you to prove that you had the expense and paid for it out-of-pocket, with non-HSA funds, and saved the receipts.

Although HSAs provide an excellent way to pay for medical expenses with tax-free funds (and to allow those funds to grow tax-free over many years or decades), withdrawals used for anything other than medical expenses are subject to income tax and a 20% penalty. But that penalty is no longer applicable once you reach age 65. At that point, there is no longer a penalty for withdrawing HSA funds and using them on non-medical expenses. You will, however, pay income tax on those funds. But as discussed below, you can use tax-free HSA funds to pay Medicare premiums, medical expenses, or long-term care costs.

Which medical expenses can be paid from my HSA funds?

HSA-eligible expenses may include deductibles, copayments, coinsurance, vision and dental care, and other out-of-pocket medical costs. And the range of services that qualify is broad: You can use your HSA to pay for COVID tests (at-home tests no longer have to be covered by most health plans, but they can be purchased with HSA funds), over-the-counter medications, acupuncture, chiropractor services, and various other complementary medicine (the services you can use it for are outlined in IRS Publication 502).

From 2011 through 2019, individuals were not able to use tax-advantaged money from an HSA for over-the-counter drugs that were not prescribed by a doctor. But that changed in 2020 due to the CARES Act, which also changed the rules to allow HSA funds to be used to purchase menstrual products.

Can I use my health savings account to pay for my spouse’s medical expenses?

Yes, you use the account to pay for the medical expenses of a spouse or other family members even if they aren’t covered by your HDHP. Family members include dependent children or qualifying relatives. In other words, it’s anyone who is a part of your tax household – even if they aren’t covered by your HDHP.

What happens to my HSA if I switch to coverage that’s not a high-deductible health plan?

Your HSA belongs to you, regardless of what happens with your health insurance. But if you switch to a non-HDHP (or if you gain coverage under a second health plan in addition to your HDHP), you have to stop making contributions to your HSA at that point. You can still withdraw tax-free funds from the HSA to pay medical expenses, including out-of-pocket costs under your new non-HDHP health plan.

You can no longer contribute to an HSA once you’re enrolled in Medicare — even if you continue to work and have HDHP coverage from an employer, in addition to Medicare. But you can continue to withdraw tax-free funds from your HSA after you’re enrolled in Medicare, as long as you use the money to cover out-of-pocket medical expenses, including Medicare premiums (this is discussed in more detail below).

How do I report HSA information to the IRS?

As of the 2018 tax year, the IRS shortened the main 1040 and moved things that used to be on the main form onto a series of schedules instead. So while you’ll still use Form 8889 to report your HSA contributions and withdrawals, the HSA contribution deduction (if you’re eligible for it) on Form 1040 now shows up on Schedule 1.

But nothing has changed about eligibility for the deduction itself. Assuming you make after-tax HSA contributions (ie, not through a payroll deduction, since those are already pre-tax), you’ll get to deduct them on your 1040 and avoid paying income taxes on the amount you contributed.

If I don’t use my HSA funds now, can I use them to pay for Medicare or long-term care?

Yes. This is a popular financial strategy among people who have many years to invest in an HSA and are able to pay for routine medical bills with non-HSA funds.

You cannot continue to contribute to an HSA once you’re enrolled in Medicare (for most people, this happens at age 65). But you can continue to use your HSA funds entirely tax-free after age 65, as long as you only withdraw money to cover qualified out-of-pocket medical expenses. And once you’re 65 and enrolled in Medicare, you can use your HSA funds to pay Medicare premiums for Part B, Part D, and Part C (Medicare Advantage).

(Medigap premiums are not considered an HSA-eligible expense, so tax-free HSA funds cannot be used to pay them. And non-Medicare premiums are generally never an expense that can be covered with tax-free HSA funds, unless you’re receiving unemployment benefits or covered under COBRA. All of this is clarified in IRS Publication 969.)

Long-term care costs can also be paid with tax-free HSA funds. Long-term care is not covered by Medicare, and long-term care insurance tends to be quite expensive. If you’re able to consistently save money in an HSA over several decades, you could end up with a sizeable chunk of money that can be used, tax-free, to cover the cost of long-term care.

Health savings accounts get mixed reviews

The country is largely split over the question of whether health savings accounts are a wise coverage solution on a large scale – and whether HSAs help or hurt the nation’s health care system.

Proponents of HSAs argue that people tend to be more careful with their own health care costs when they’re paying part of the bills themselves. So instead of going to a doctor for every cough, cut, or cramp, HSA users would have an incentive to be less wasteful with their health care spending, and maybe even take the time to shop around.

They say that the cumulative effect will be a nation of health consumers whose behavior would lower health care costs, while injecting price and quality competition into the medical marketplace. And tax advantages, they say, could lure the uninsured into lower-cost, high-deductible plans, reducing the ranks of the uninsured and possibly even nudging them into healthier lifestyles.

Critics of HSAs argue that health savings accounts benefit the young and healthy, while those with regular medical problems or who are older may end up paying more if they select an HDHP/HSA combination, because they tend to drain their savings with more frequent up-front medical expenses.

But this would be true of any comparison between higher-deductible plans (generally favored by healthier people) and lower-deductible plans. And it’s also worth noting that people with very high-cost medical needs sometimes end up better off with an HDHP/HSA combination, because the tax savings from the HSA and the lower premiums for the HDHP are enough to more than offset the higher deductible (and “high deductible” is becoming a bit of a misnomer, since overall deductibles have been rising fairly rapidly, resulting in HDHPs with deductibles that are often comparable to or even lower than the deductibles on non-HDHPs).

Another argument is that the tax-advantaged option constitutes a tax shelter for the rich, and that low-income families don’t earn enough to benefit from the tax breaks. Further, skeptics warn that many people with HSAs — and especially the poor — might be reluctant to spend money from their savings account, even on necessary healthcare expenses. Although a reduction in spending on unnecessary care would be beneficial, it’s often hard for a consumer to know what care is necessary and what’s unnecessary, and skimping on the former could lead to higher-cost problems later.

But it’s worth noting that the ACA requires all plans — including HSA-qualified plans — to cover certain preventive care with no cost-sharing. And the IRS issued guidance in 2013 to bring HDHP rules income compliance with the ACA’s requirements. So all HSA-qualified plans (effective January 2014 or later) cover the full range of recommended preventive care before the deductible.

How do I set up a health savings account?

Enrollees can choose from a long list of banks, credit unions, and brokerage firms that offer accounts for saving and growing HSA funds. To establish and contribute to an HSA, you’ll need to have health coverage under an HDHP.

Many businesses, large and small, offer HDHP coverage to their employees, but you can also purchase an HDHP on your own through the exchange in your state or directly from a health insurance carrier. For people who buy their own insurance, HDHPs are available in nearly every county in the US. If you’re shopping on or a state-run marketplace, the HSA-eligible plans will be designated with an icon or a small notification. And you’ll be able to use a search filter to narrow the plan selections to only show HSA-eligible plans.

HSAs became available at the beginning of 2004.4 The number of HSAs in the U.S. had soared to 30 million people by the end of 2020, covering 63 million Americans. And more than half of people with employer-sponsored coverage were enrolled in HDHPs as of 2022 (although there was a slight drop from 2021, and not everyone with an HDHP chooses to open an HSA).5

Where should I keep my HSA funds?

Health insurance companies and employers will generally recommend a bank that insureds can use to establish an HSA once they’re enrolled in an HDHP, but enrollees are free to select any HSA custodian they like.

If you’re enrolling in an HSA through your employer, you’ll likely need to use the HSA custodian that your employer selects in order to have your pre-tax contributions payroll deducted and in order to receive any contributions that your employer makes on your behalf. But once the funds are in your account, you’re free to transfer them to another HSA custodian if you choose to do so.

A long list of banks, credit unions, and brokerage firms offer accounts for saving and growing HSA funds over time, so shop around before you select an HSA custodian. The saving accounts include a dizzying array of options. And brokerages offer countless stocks, bonds, and funds to invest in with low trading fees, while others may have limited choices, are more expensive, and have hidden fees (HSA Search is a useful tool showing fees charged by hundreds of HSA custodians, but it is by no means an exhaustive list of all the available HSA custodians; check with your bank, credit union, or brokerage firm to see what they offer as far as HSAs, and what fees they charge).

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for


  1. Revenue Procedure 2023-23” Internal Revenue Service. Accessed May 21, 2024 
  2. Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans” Internal Revenue Service. Accessed May 21, 2024 
  3. Revenue Procedure 2024-25” Internal Revenue Service. Accessed May 21, 2024 
  4. Fact Sheet: Guidance Released on Health Savings Accounts (HSAs)” The White House, President George W. Bush. Dec. 22, 2003 
  5. High-Deductible Health Plan Enrollment Falls for First Time Since 2013” ValuePenguin. Jan. 22, 2024 

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